I haven't been very active in the community recently and today I decided that it is time to begin sharing some of the successful trading strategies I'm using with my first article.

The Bollinger Bands indicator always fascinated me and I've been lucky to meet John Bollinger several times in person during trade shows and seminars. He has a deep knowledge about the markets and is a very funny and humorous guy. If I had to describe him with one word: simply genius! Depending on how old you are and since when you're using computers you probably can imagine how things were when he invented the Bollinger Bands. Some decades ago we had no Excel or sophisticated trading platforms and the process of calculating the bands was a very work intensive task. To simplify things, we can also see the Bollinger Bands as a statistical model with a moving average (middle channel), a line above two standard deviations apart (upper channel) and a line below also two standard deviations apart (lower channel).

There are numerous ways one can use the Bollinger Bands for trading the markets. Today, I like to show you the my Bollinger Band strategy I'm using in trending markets. This is not endorsed by John Bollinger at all, it's just a way I make the use of the bands that fits my needs.

Let's get started:

Time frame:This strategy works in any time frame, simply pick the one you're comfortable with.

Markets:You can use this strategy in any market. To get signals, you need a trending market (uptrend or downtrend). If your market is not trending, there will be no signals.

Trend definition:If the middle channel line is rising we assume an uptrend and take only long signals.If the middle channel line is falling we assume a downtrend and take only short signals.As mentioned before, the middle channel is simply a moving average, but we will need the channels later - so the only indicator you need on a chart are the Bollinger Bands.Most of the times, you will have expanding channels since the volatility rises - that's another excellent indication that you left a sideways market and entered a trending market.

Bollinger Bands Settings:I like to keep it simple and keep the default settings of 20,2,2. That's a 20-period moving average with channels two standard deviations apart. You can take shorter and longer periods, but it does not make any difference, since you also can switch the time frame back and forth with the same standard settings.

When to enter the market:In an uptrend, we wait for the price to come down to the middle channel line. That's the point we get our signal to enter the market with a long order. Respectively in a downtrend, we wait the price to go up to the middle channel line. That's the point we get our signal to enter the market with a short order.

Take Profit and Stop Loss:In an uptrend, our initial Take Profit point is simply the upper channel line. Our Stop loss is set at the lower channel line. Again, in a downtrend our TP is the lower channel and our SL the upper channel. So Risk/Reward-Ratio is always at 1:1.

How does it look in on chart?

I've picked the EURUSD chart with a 15 minute time frame from November 18th 2014. Here it is:

First, we identified that the market is in an uptrend, since the middle channel line is rising. Next, we wait for the market to go down to the middle channel line. This happens between 12:00 and 13:00 at 1.2505. It does not matter if you entered the market at the low of 12:15, 12:30 where the price just touched the middle line or 12:45 when the market crossed the middle line. The main point is that we entered the market at 1.2505. Immediately after entering the market, we set our Stop Loss at the lower channel at 1.2480 and our Take Profit at the upper channel at 1.2530. Three bars, or 45 minutes later the price hit our target at 1.2530 and we made a profit of +35 pips.

For those of you watching the price action closely, you'll recognize the market hit the middle channel a second time at 13:30. Since we are still in an uptrend, that would have been another chance to enter the market again around 1.2510 and take another profit of +20 pips just one bar or 15 minutes later at 1.2530.

If this strategy picked up your interest, this is the time to vote for my article and comment it. I'm always happy to answer your questions and glad to explain it in the community in case I win :-)

Full Day Example

Enough advertising, let's get back to work and let me show you another chart with even more comments. At this point you understood the basics and you probably can follow me easily. This time I picked December 3rd 2014, again the 15 minute chart on EURUSD.

We are in a sideways market, the price is touching the lower channel. We do not trade yet, but will watch how the market behaves.

The lower channel is being broken a second time. The bands are starting to expand. The middle channel line (or moving average if you wish) started falling. No trade yet, but we are ready, since the market is in a downtrend channel now.

The middle channel is being touched from below. Here we enter our first short trade, set our SL at the upper line and our TP at the lower line.

15 minutes later, the lower channel was touched and we hit our target. Thats about +15 pips. Now, we are back in "entry mode" waiting for the next touch of our middle channel.

Here it is, we enter the market again with our second short.

Two bars later, our target at the lower channel line was touched again. +25 pips here.Well, we took our profit too fast, the market continues to fall for another 35 pips. This is the time not to get upset or greedy. We took our profit at the beginning of the sharp move down and the only thing to do now is to wait for the next entry.

Finally, we had to wait several bars and went through a lot of patience. The channels are already narrowing but we take our chance and go short again. Don't forget to set your TP and SL.

One bar after our entry the market almost hit our stop loss. That's why we place stops, we never know what happens next. We were lucky again and our take profit was hit two bars after entry. That's more than +10 pips again. See, market continues to fall and we would have made another 20 pips. Correct, you remember what we said at the last trade. No need to be upset. Be patient.

Our next chance. We took it and shorted the market again at the middle line.

Two bars later our target was hit. Almost +20 pips here. And: We took profit almost at the low of the day - now, that makes us feel good. Back to work, we are in "entry mode" again.

Here is the next change to take the short at the middle line.

TP was hit 5 bars later. Another good +15 pips.

Market goes back to the middle line, ready for the next short. Wait! What do we have here? The channel becomes narrow again, at 19:00/20:00 GMT London closes and NY session is almost over and the middle line becomes flat which indicates that we are not in a downtrend any more. You guessed it, we don't take this trade. We sit and wait for another trend on another trading day or another market.

Let's summarize, we took 15 + 25 + 10 + 20 + 15 = +85 pips with a small risk of 10 to 25 pips every time. How much did the whole market move during that trading day? Let's see. Daily high was around 1.2390, daily low just above 1.2300. Daily Range almost 90 pips. What did we make? Yes, you're right - we won almost the whole daily range that day!

Daily chart example

I hope you guys have fun, that's why I want to attach one last picture to get the feeling of switching modes. Here I picked the daily chart of EURUSD which shows us different stages.

Since February we had an uptrend and took a long trade at 1.3675 which was exited 6 trading days later at 1.3850. Then we went sideways. With a sharp fall we entered a downtrend in May, where we took a short trade at 1.3660 in June. That order was closed with a profit two days later at 1.3550. Switched back to sideways mid of June.

That finalizes my article with using the Bollinger Bands in a trending market. Keep your questions rolling and see you during a presentation or with the next article next month :-)

Thanks, today I am trading solely this strategy on my trader contest account. Up +100K on the day so far to a new personal record of +600K. I have picked some live trades and wrote about them on my trader contest blog.

Yes, but I don't like the fact that MACD is lagging a lot and very difficult to read on a live market (at least for me). The good thing about having "only" the BBs is that you have a bigger chart and immediately see your SL and TP.That's all you need. The only decision that has to be made is if you enter the trade or not if the middle line is touched.

Very interesting. I want to ask how do you set your stops as you never know how many bars will take to reach them and because of the dynamic nature of the BB you'll never know at what level they will be. Thanks.

@garisan, thanks for your good comment. You are totally right about the dynamic nature of the bands.

I do not adjust the stop to widening bands, since that would damange the risk/reward ratio. Normally, you are just fine to keep the initial stop. If you like, you can adjust it closer to your entry as the market moves and as the respective band goes in your direction. But never move it away, because your account risk gets higher than initially planned.

With targets I adjust it according to the bands though - I guess I explain the whole trade management in a separate article.

Hi mate, thanks for the text.
At your first analysis (EURUSD chart with a 15 minute time frame from November 18th ), you´ve determined the stop loss being the same as the profit one, in absolute values. Dont you think that by risk management, the stop loss point should not be the same value as the take profit one? Normally,shouldn´t we step back in operations in which the stop loss is, for example, 20 pips, and the take profit one, also 20 pips? I say this in real trades, not in simmulations. Cheers !

@lstbsb thanks for your comment. You can alter the strategy as you wish as any traded strategy must fit the personality. If the bands are at 40/40 distance for TP/SL you can also do 20/20 or 20/40. I personally like the 1:1 ratio since I can keep focusing on having a higher win ratio than 50%. I will explain my stop strategy in the current months article.